FEDERAL Treasurer Scott Morrison has scuttled the $10 billion-plus sale of New South Wales electricity distributor Ausgrid to Chinese and Hong Kong investors because it could threaten national security.

Premier Mike Baird famously announced ahead of the 2015 State Election he had "no Plan B" to fund his government's big-spend budget if he failed to secure the 99-year lease of his states poles and wires infrastructure. 

Two bidders were in the running for to take a 50.4% stake in the assets - Chinese government-owned State Grid Corporation and the Hong Kong-based company Cheung Kong Infrastructure.

Mr Morrison stressed his rejection was only preliminary and invited the bidders to make further submissions by August 18.

"My preliminary view is that the foreign investment proposals put to me for this transaction are contrary to the national interest, in accordance with the required provision on the grounds of national security," he said.

He cited "critical power and communications services" Ausgrid provided to businesses and governments as his core concerns.

NSW Treasurer Gladys Berejiklian said the transaction process would continue.

"We can assure the people of NSW that regardless of how the process plays out, there will be no delays to our infrastructure pipeline and that we remain well on track to deliver on our promise to transform this state," she said.

"We will continue the transaction process for Ausgrid and note strong interest from investors in the asset."

Mr Morrison said Australia was still open to, and relied upon, foreign investment.

"As Treasurer I consider each foreign investment proposal on its merits," he said.

"Foreign investment has underpinned the development of our nation and we must continue to attract the strong inflows of foreign capital that our economy requires.

"Without foreign capital and investment, Australia's output, employment and standard of living would be lower.

"The foreign investment framework facilitates such investment while giving assurance to the Australian community that the investment is being made in a way that does not compromise Australia's national interest.

"We will continue to welcome foreign investment that is not deemed contrary to our national interest."